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How to unlock the cash you didn’t know you had

12 December 2017

By My Financepartner

First things first, businesses don’t go bust because they run out of profit; they go bust because they run out of cash. So why do so many business owners struggle to stay on top of this? Allow me to explain where cash may be lurking in your business, how to free it up and the power you could place in the hands of your sales team with an accurate, real-time overview of your cash position.

Avoid joining the ‘Disastrously Successful’ Club

Ask yourself why did you go into business? Chances are you aimed to create more cash over time than you started with. The problem many businesses face is that this goal gets complicated when accountants get involved (we know, we know). Suddenly time is broken down into periods, then you’re grappling with accruals, capitalised costs and prepayments. Before you know it, you’re dealing with profit instead of cash. And if your reporting is set up to focus on profit only, you might have no idea that you’re about to run out of cash. Businesses can run a long time on small to non-existent profits if there’s cash to pay the bills and keep the wheels turning, but flip the scenario and you’ll join an exalted list of business with great ideas, great profits but a disastrous lack of working capital.

First, let’s take a look at where your business could be leaking cash. Take a few moments to re-examine your overheads, profit margins and wastage. On the customer front, you could revisit your payment terms and check how long it typically takes people to pay you (as well as checking whether you’re paying people earlier than you need to). And finally, we hate to mention it, but you also need to make sure your reporting gives you the transparency you need to guard against fraud.

The three main places cash could be tied up in your business (and how to unlock it)

While the specifics can vary depending on your industry and business model, start by looking at the following areas to see where cash could be ‘resting’, rather than being put to work.

Assets: In other words; office space, warehousing space and equipment. Many businesses find their physical assets can take a chunk of cash, but are you getting the best return from this investment? Smaller businesses could take advantage of shared office space, or think about ways to recoup cash by renting unused space and equipment. If that’s not appropriate for your business, then check whether there’s room to negotiate better deals with your landlord and suppliers.

Debtors: Take a closer look at your order book – and more specifically at who hasn’t paid you. You should think about your debtors as though you’re a bank. After all, you’re essentially lending them your cash. Like a bank, look to understand your customer profile How to unlock the cash you didn’t know you had (and their ability to repay you) and then monitor for signs of trouble. Don’t be afraid to be ruthless for consistently poor performers – a large order means little if your customer takes 120 days to pay you.

Inventory: When it comes to stock, you should think like a supermarket. Supermarkets are the masters of understanding exactly how much product they have, how quickly it’s selling, how much they paid for it, when it must be sold by and, most importantly, what action is needed to maximise their potential returns. While it can be hard to fight the temptation to hang onto stock on the off-chance that one day someone will buy it, don’t underestimate the power of cash in your pocket.

The impact of cash on your sales strategy

Let’s test out a scenario: Suppose you run a business selling pens and your best salesman has secured a huge order from one of your biggest customers by offering a 20% discount. Should you accept the order? Traditional management information would show that with a selling price of, say, £400,000 and a cost price of £100,000, you would stand to make a gross profit of £300,000 (75%) on the order. But what about your cash position?

When you consider the information you need to know from a cash perspective, such as your current stock level, minimum order quantities from your suppliers and payment terms, a different picture could emerge. For example, let’s say you need to order in more stock to fulfil the order – at £200,000. That’s an upfront funding requirement today of £200,000 to receive £500,000 in three months’ time (assuming your customer pays on time). If your cash balance was £200,000, then you’ve just accepted an order that will leave your business with zero cash. Welcome to the world of the disastrously successful.

But replay that scenario and imagine the possibilities if the salesperson making the deal had real-time information on your cash position at their fingertips. Suddenly, they could demand a 50% upfront payment as part of the deal, push the customer towards another product that you already have in stock or even look into factoring the debt in real time, adjusting the discount to maintain the margin.

Today modern cashflow forecasting tools and management information are using the power of cloud to go real-time. With a cash-orientated mindset and a digitally enabled workforce, you now have the ability to take control of your cash and shift the power balance back in your favour.

This blog is part of a series from My Financepartner. My Financepartner is a new accounting service for small and medium-sized businesses that puts you in control. You choose the services that you need, module by module, and we'll deliver them. Contact us at my.financepartner@uk.pwc.com